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The outlook for July

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Peter Switzer and Paul Rickard look at how the market performed during June and discuss this month’s outlook.



Peter Switzer:    Hello and welcome to Switzer Investing Insights, brought to you by nabtrade. Today we want to look at the outlook for investing over the month of July. Paul?

Paul Rickard:     Let's start with June first of all and just see how the year's gone. Look, Peter, the market's up 17.2% year to date, 19.7% when you add dividends, that's the accumulation index. That's pretty good. Let's look at the components, that tells another story. The top 20 stocks affect the top 50 stocks, Peter, are doing okay. In fact they're leading the market. The Midcap 50, which is stocks ranked 51st to 100, they're lagging a bit and the small ordinaries, the stocks ranked 101 to 300, they're also lagging. So it's been the top part of the market that's really taking the market high.

Paul Rickard:     We'll get another story we look at the actual 11 industry sectors that make up the market. Look, there are two standouts from this. First of all, communication services, that's Telstra right? Up 31.8%.

Peter Switzer:    I don't think voters helped very much on this.

Paul Rickard:    Last couple of years Telstra's been a big weight on the market. Telstra's actually done extraordinarily well and come good this year. But the other standout I think, Peter, is that the gap between the best performing sector, that's communication sector services at 31.8%, and consumer staples at 11.4%, that may look a lot but by historical standards that's not a big gap. And so all the sectors are up, all are largely performing to some extent, and we've got a rather bizarre situation where it's not sector led, there's some really unique factors at play, big drop on interest rates helping a lot of the-

Peter Switzer:    Cheap money.

Paul Rickard:     Cheap money, a lot of the defensive stocks, that's why things like real estate is doing well, it's why things like industrials are doing okay because of things like Transurban in Sydney Airport. The phenomenal increase in the iron ore price, which is all to do with the accident in Brazil in January, that's why the material sector is doing so well, standout at 26.6, and gold prices have soared, again largely because of lower interest rates, and a bit of uncertainty. So it's a funny market, it's not led by cyclicals.

Peter Switzer:    I think one interesting aspect is you mentioned real estate, a lot of people are saying how could it do so well, house price is falling, but this is more commercial, industrial, and all those sorts of things because it was like a bomb proxy area when Bill Shorten was threatening no more franking credit, wasn't it?

Paul Rickard:   And that's the way to money because the yield you're getting on commercial property, people that look relatively attractive, and that's why they've bought real estate investment trusts. So that's why they're plus 9, 8 percent. So it's been a tough market for a lot of the fund managers because they ... And an unusual market because normally when markets are going high you expect your so-called growth and your cyclical companies to lead it.

Peter Switzer:    Yeah, very unusual.

Paul Rickard:   They haven't. In fact, a lot of them have been very badly beaten up. So, stock peekers are doing it really tough in this market.

Peter Switzer:    And low interest rates help those bond proxy stocks. Let's go to the next big issue, namely the outlook for July, the international issues.

Paul Rickard:     Well, undoubtedly the trade dispute, Peter, it's the number one issue globally and look, I guess your guess is as good as mine, I mean I think Donald wants to play this right out and he wants to win but again, he's got the pressure of the election in the US next year so he'll need to do a deal but it doesn't seem, despite the rhetoric at the G20, doesn't seem really super hard to get that done.

Peter Switzer:       Well, he's being helped by Jerome Powell, the Fed boss, who now is talking about interest rate cuts. That gives him time to drag out the trade talks, otherwise he could have a recession on his hands and I think that's the reason why we probably will have to wait to see what happens.

Paul Rickard:       Well, that leads me on to the US Federal Reserve, Peter, that concludes its meeting on the 31st of July. Market expectation is for an interest rate cut there, we will see. Iran's a bit of a curve ball still, so still out there, there's some noises in Iran and that's going to play out.

Peter Switzer:       Helping the gold price as well.

Paul Rickard:      Helping the gold price. Look, the big news for the US this month is of course, it's the start of the quarterly earning season so this is Q2, quarter 2 in the US, and it really starts at about the 12th of July, peaks about the 30th of July Peter, so it's right at the back of the month but you're going to see the market very much focused on how earning season is progressing.

Paul Rickard:     Current forecast is not much growth, in fact some analysts saying negative of about -2%, to some who are just marginally positive. This of course is comparing this quarter, quarter 2 of 2019 versus the same quarter in 2018. That says a lot of things about the market, the market's gone up a lot but earnings haven't. And again, maybe it won't be so much the historic number that the analysts are worried about, it's more about their forecasts for quarter 3. So that's the big issue to play out.

Peter Switzer:    Because that forecast will be affected by whether the individual companies are being affected by the trade war. It's going to be a very important revelation for the stock market.

Paul Rickard:     And I'm hearing increasingly in news, more companies being affected by the trade war. Tariffs, remember, are tax, and they increase the costs of lots of companies. So if you go to the Midwest, and arguably quite a few companies saying that tariffs are starting to hurt them. So look, we'll see how that plays out. And of course it's summer holidays in both the USA and northern Europe, and typically markets get a little bit quieter in that period. So there are some of the things on the horizon in July internationally.

Peter Switzer:    Okay, let's go to the local situation now.

Paul Rickard:     Well, we're seeing two rate cuts, so the big question is is the Reserve Bank on hold?

Peter Switzer:    I think so, until Cup Day.

Paul Rickard:     Right, so I think that's important. Look, we've also got a tax cut to come through, so that should help give a bit of stimulation but for us in Australia the big issue is earning season in August. We only have two of these and of course this is most companies' four year earnings report, so what we will see in July is more of confession season, that's when companies have any bad news, trying to get the bad news out of the way before they hit with their earnings.

Peter Switzer:    So religious, isn't it?

Paul Rickard:     It's a bit religious, but we do have these very cashed up investors and that's what the big impact of 2019 has been, we've got so much cash out there. We had all these dividend payments, we had all these buybacks, interest rates come down so low, lots of people in term deposits saying, "What do I do with my cash?" And no new supplier, we're not seeing any IPOs or things to soak up the cash. That's one of the reasons why the market has gone up because just the function of demand for stock and I still think investors, you look at the figures coming from a lot of the fund managers, still pretty cashed up.

Peter Switzer:    Yeah, and if interest rates are so low as they are, people have to chase income somewhere, and that's why defensive stocks have done very well. But you look at it this way, Paul, a market does invest ahead of what might happen in six months’ time. This market is actually predicting that the economy will improve, tax cuts, rate cuts, infrastructure spending, a lower dollar, a new government, all these things I think conspire to give us a rough chance of seeing the economy improving in the second half.

Paul Rickard:     Well, on that basis you'll be looking at some of the cyclicals, Peter, but it's a pretty brave call. I'm a bit wary about defensive stocks because they've had a great run and I just wonder how much further they can go, I mean it's an unusual market.

Peter Switzer:    Well, what would you be investing in?

Paul Rickard:     Well, I'm a little wary so I still think this is a market to be long and still, right, because the trend is up and there's no reason you have to change your position on that market. You've got to play markets for the long term. I this is probably more the case, a slightly more defensive way to play this market is to look at some of the index stocks. That way you're fairly nimble, you're not exposed to some of the individual stocks.

Peter Switzer:    What you're saying, Paul, is you're buying an index for the top 200 stocks in the ASX 200, index like the A200, ETF from BetaShares, STW, Vanguard's VAS, and iShares' IOZ.

Paul Rickard:     Yeah, and if you're a little more courageous, Peter, you might like to look at some of the cyclicals. One way you could look at that potentially is through things like the small ordinaries, and there's of course an iShares ISO-

Peter Switzer:    That's for the courageous.

Paul Rickard:     It's for the courageous, but look I think I'm a little nervous and I think I'm going to play it more through an index basis I think.

Peter Switzer:    But eventually you know Paul, as long as there is a trade war settlement, there will be an uptick in growth and that will be good for the rotation aspect out of those defensives into more growth oriented stocks.

Paul Rickard:     And we see that all the time, rotation happens and eventually the market will like cyclicals again, but again you've got to pick the timing on that a little bit.

Peter Switzer:    Yeah. So that's Switzer Investing Insights, brought to by nabtrade. Thanks for joining us.